Is Apple’s share price overstretched right now?

Apple’s [AAPL] share price has more than bounced back after underwhelming fourth quarter earnings. Since the start of November Apple’s share price has gone from around $148 to close Friday at $160.55, a 7.1% gain.

For bulls, Apple’s share price could have a little further to go, even as it trades at its post-stock split high. For bears, Apple’s share price is overstretched with a slide all but an inevitability - especially after the strong gains in the first half of the year. Meanwhile, Morgan Stanley reckons that Apple could benefit from the hype surrounding the metaverse.

Apple’s share price slips post-earnings

Apple’s share price slipped at the end of October after its most recent quarterly earnings missed Wall Street expectations. While earnings of $1.24 a share met the Street’s estimates, revenue of $83.36bn was well wide of the forecast $84.85bn - even if it was up 29% year-on-year. iPhone, Mac and services revenue all missed expectations, although iPad sales managed a beat.

Apple CEO Tim Cook pinned the miss on supply chain constraints that have affected tech companies in the pandemic. Cook said that the quarter ending December would see “solid year-over-year revenue growth” but that supply constraints would be higher.

Metaverse could be a future growth driver

Analysts at Morgan Stanley have declared that should Apple pivot to developing products for the much-hyped metaverse, then the concept could really take off, writing “The real catalyst, in our view, comes if or when Apple enters the space". So while Facebook [FB] (now known as Meta Platforms) and Alphabet [GOOGL] are developing products around the metaverse concept, Apple's presence would be the real driver for the concept to take off.

Morgan Stanley’s stance comes after talking to several augmented and virtual reality companies, as reported by Bloomberg. The market for the gadgets and headsets needed to experience the metaverse - basically an immersive version of the internet - is set to be worth $100m in 2030, growing five-fold by 2040.

“The benefit of Apple’s more patient approach to entering new markets is that the chances of success increase with a more informed approach to disruption” - Morgan Stanley analysts Katy Huberty and Erik Woodring

“The benefit of Apple’s more patient approach to entering new markets is that the chances of success increase with a more informed approach to disruption,” wrote Morgan Stanley technology analysts Katy Huberty and Erik Woodring.

Apple has form waiting to see how a new technology takes hold before entering the market - the iPhone came out in 2007, several years after the first smartphones had emerged. The analysts also point to a Harris Poll which found that for 35% of those polled, Apple would be their first choice to buy AR/VR devices, beating Google, which came in at 20%.

What the analysts say about Apple’s share price

Despite faith in Apple being able to sell the metaverse concept, Morgan Stanley have been prudent when it comes to their price target. In October, Morgan Stanley’s Katy Huberty trimmed her Apple share price target from $168 to $166, maintaining an Overweight rating on the stock. Huberty's price target isn’t too far away from Friday's $160.55 close, and headwinds for the stock include supply chain issues, although Apple could be better placed than some of its competitors.

A couple of weeks before tweaking her price target, Huberty wrote "We are buyers of any near-term Apple share price weakness on iPhone supply-chain disruption given Apple is likely to receive more supply than competitors, demand isn't perishable."

Bernstein’s Toni Sacconaghi has been bearish on Apple for years, and in a recently published report suggests the stock should be priced at $132. Although Sacconaghi’s bearish outlook on Apple’s share price hasn’t played out since downgrading the stock to Neutral in February 2018 - in that time Apple’s share price has easily outperformed both the S&P 500 and Nasdaq.

“In reality, much less than 2% of Apple’s revenues and 5% of [operating] profits will likely end up being cut as a result of the App Store’s payment changes, as many users will continue to choose Apple as their payment platform of choice” - The Street's Daniel Martins

According to The Street’s Daniel Martins, Sacconaghi’s case rests on the stock climbing too fast in the first half of the year, tough competition and Apple having to allow third-party payment methods on its app store. Martins doubts that the risks are as bad as all that.

“Even Sacconaghi’s estimates of the financial risk only represents the worst-case scenario. In reality, much less than 2% of Apple’s revenues and 5% of [operating] profits will likely end up being cut as a result of the App Store’s payment changes, as many users will continue to choose Apple as their payment platform of choice.”

Among the analysts tracking Apple’s share price on Yahoo Finance, the stock has a $168.45 target - hitting this would see a 4.9% upside based on Friday’s close.